John Cochrane: Brazil Needs Structural Fiscal Reform, Not Just Rate Cuts
Stanford economist warns that Brazil's fiscal sustainability requires deep spending reforms rather than monetary shortcuts.
1Cochrane's Skepticism on Proposals
Economist John Cochrane, a researcher at Stanford's Hoover Institution, has expressed skepticism regarding André Lara Resende’s proposal for a new fiscal and monetary council in Brazil. While acknowledging the theory's sophistication, Cochrane argues that lowering interest rates alone cannot solve the country's deep-seated fiscal problems without long-term, structural spending adjustments.
2The Necessity of Fiscal Adjustment
Cochrane emphasizes that Brazil's current economic framework lacks the necessary sustainability to support independent monetary policy shifts. He argues that any institutional change must be backed by permanent primary surpluses. Without a credible long-term fiscal plan, market confidence will remain low, preventing the sustainable reduction of interest rates.
3Social Program Spending Distortions
A core component of Cochrane's critique involves the structure of Brazil's social programs. He suggests that these programs contain significant distortions that require reform to ensure aid reaches only the most vulnerable. He advocates for a review of how benefits are indexed, specifically criticizing the current minimum wage adjustment mechanism.
4Minimum Wage Policy Critique
Cochrane takes a firm stance against the current minimum wage indexation, which follows the INPC inflation index and past economic growth. He suggests that Brazil should move away from this model entirely. He believes such rigid indexation mechanisms hinder economic flexibility and contribute to the country's broader fiscal instability challenges.
5Fiscal Deficit Data Context
Official data from the Central Bank shows that Brazil recorded a primary deficit of 0.52% of GDP in the year ending September 2026. When including interest payments on public debt, the nominal deficit reached 9.51% of GDP. The last primary surplus was recorded in May 2025 at 0.15% of GDP.
6The Role of Interest Rates
André Lara Resende proposes a council to lower the Selic rate, currently at 13.75% annually, to reduce the nominal deficit. Cochrane warns that if politicians lower rates without fiscal discipline, the government might simply increase spending. This would undermine the potential benefits of lower interest costs on the national debt.
7Lessons from Argentina's Model
Cochrane points to Javier Milei’s administration in Argentina as a potential parameter for fiscal reform. By implementing deep spending cuts, Milei transformed a 5% GDP deficit into a surplus. Cochrane notes that while the fiscal adjustment came first, it successfully led to lower inflation and reduced interest rates for the country.
8The Theory of Price Levels
As the author of the 2023 book on the fiscal theory of the price level, Cochrane argues that fiscal and monetary policies must work in tandem. He rejects the notion that theory and practice are distinct, insisting that policies must be tailored to specific situations to ensure long-term debt repayment.
9Investment vs. Debt Growth
Regarding the government's strategy of increasing debt to fund investments, Cochrane remains skeptical. He questions whether politicians possess better judgment than private investors in identifying productive projects. He cites the California high-speed rail project, which cost $30 billion without completed tracks, as an example of inefficient public investment.
10Global Context of Debt
Cochrane notes that many nations, including the US and European countries, have engaged in excessive borrowing over the last two decades. He suggests that low interest rates previously masked these fiscal risks. Now, with rising interest rates, governments are facing pressure to reconsider their spending habits and restore fiscal balance.
11The Risk of Policy Shortcuts
Cochrane warns that the international political community might view the proposed council as a naive or dangerous idea. He fears that without a pre-commitment to fiscal discipline, any attempt to manipulate interest rates will fail to generate the necessary confidence among investors to stabilize the Brazilian economy long-term.
12Path Toward Economic Stability
Ultimately, Cochrane believes that stabilization requires reliable, small primary surpluses during good economic times. This would signal to investors that the debt will be repaid, allowing the country to borrow during future crises. He concludes that Brazil must prioritize fiscal credibility to allow the Central Bank to function effectively.